While flying back from a private speaking engagement, I recently spent a couple of hours watching the 1984 Milos Forman film Amadeus. It wasn't a random Apple Genius selection.
Earlier that day I had met with a small group of elite RIAs. Over the course of our discussion, the conversation kept returning to various proposed regulatory initiatives and their potential impact on these firms. I could sense the anger and frustration mounting as we reviewed each topic. The indignation was justifiable, of course. Independent advisory firms seem to keep coming out on the short end of recent initiatives.
As I thought about our discussion on the flight home, I sat (rather uncomfortably) in search of a simple metaphor that would summarize the regulatory environment. And that's when this modern classic film popped into my head.
Along Comes Mozart
Think of the "Big 4" wirehouses as the Antonio Salieri of the investment world-competent yet fatally flawed and limited in their abilities, but nevertheless firmly entrenched. One day, however, along comes a true virtuoso: the fee-based independent investment advisor.
Initially, Salieri looks upon this upstart as nothing more than a passing nuisance. But as time passes, more and more people begin gravitating to the music of this prodigy. Even those closest to Salieri begin to defect and join forces with Mozart. For the appointed court composer who still has the king's ear, the situation has suddenly shifted from annoyance to outright crisis.
The Balance Of Power Shifts
It explains the current state of our industry and the mounting regulatory challenges that RIAs are finding themselves faced with. Simply put, success breeds envy. And when those who feel envious also have vast financial resources, it's little surprise that they arrive at a strategy to throw up competitive barriers, impediments and hurdles whenever and wherever possible.
Over the past five years alone, in the midst of difficult and turbulent markets, RIAs have seen their market share increase by more than 30% while wirehouse market share has slid by more than 16%, according to Cerulli Associates. Another stark trend is the migration of advisors from wirehouses to the RIA model. Over the same period from 2005 to 2010, the number of advisors in the RIA channel grew by 25% while their wirehouse counterparts saw a decrease of 21%, Cerulli says.
Anecdotally, some of the most successful wirehouse brokers from the most prominent firms are now peering over the fence at independence and, in some cases, jumping over. In addition, many of the RIA aggregators proliferating in recent years have boards stocked with some of the most well-known and highly regarded veterans of these Wall Street firms.
When In Doubt, Lobby, Lobby, Lobby
So how do the wirehouses and their bank/broker-dealer brethren respond to this growing sea change in the balance of power? The logical course of action would be for them to improve the value of their services, increase transparency, reduce conflicts and adopt a higher legal standard of care. Instead, they have chosen a more destructive route, using their influence and vast lobbying resources to hinder the RIA's ability to conduct business.
The Big 4 together spent more than $14 million last year to lobby politicians, according to the Center for Responsive Politics (www.opensecrets.org). Look no further than Wells Fargo's lobbying disclosures (in Figure 1) to see a clear example of the wirehouses' growing concern and their accelerated efforts to impede competition. In fairness, a major chunk of Wells Fargo's lobbying budget no doubt was spent to defend its banking business, not just the brokerage unit. All of that money seems to be paying dividends already:
In January, after investment advisors had already seen significant changes to their registration, reporting and record-keeping requirements because of Dodd-Frank, the Treasury Department's Financial Crimes Enforcement Network coincidentally announced that it would be reproposing a rule requiring certain investment advisors to establish and implement anti-money-laundering programs. This, despite the fact that advisors were previously exempt from the requirement as long as they maintained their clients' assets with a third-party independent custodian.
Despite overwhelming (although I think shortsighted) support for a uniform standard of fiduciary care to be adopted for both broker-dealers and investment advisors, lobbying groups have effectively mired the issue in debate, arguing that it would be unfair to require B-Ds to adopt the existing advisor standard. Apparently, they've convinced the SEC that a proper cost-benefit analysis is necessary to avoid unintended consequences that could "harm" investors.
There continues to be talk that Finra ought to step in as a self-regulatory organization for advisors, despite the fact that there is no evidence an SRO for advisors is necessary. An SRO would pose undue regulatory burdens on the small and midsize advisories that make up more than 90% of all RIA practices, and many believe that the SEC can effectively oversee advisors by itself.
So how can RIAs more effectively fight against the entrenched establishment and avoid the fate of Mozart?
The answer lies in their establishing a unified voice. The reason that RIAs are winning the battle for client assets and wirehouse talent is the same reason they are losing the battle on the regulatory front-they are fiercely independent. By its nature, the business model for independent investment advice fosters, even encourages, a disparity of viewpoints and precludes any sort of meaningful consensus. There is simply no unified voice to champion the best interests of the RIA.
That needs to change and it needs to change quickly. It will require a coordinated effort led by the industry's pre-eminent RIAs, by elite service providers and by major RIA custodians, an effort that will also need to be supported by anyone else with skin in the game, including industry associations. Their core belief should be that investors' best interests are served when they have unfettered access to unbiased advice, and that the RIA business model best serves this ideal. With individual agendas pushed aside, these groups have the resources to defend their independence and remove competitive barriers, impediments and hurdles to level the playing field and give voice to the independent movement.
Brian Hamburger, JD, CRCP, AIFA, is the founder and managing director of MarketCounsel, the leading business and regulatory compliance consulting firm to the country's pre-eminent entrepreneurial investment advisors. He is also the founder and managing member of the Hamburger Law Firm.